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Guest Post: How An Equity Market Prices In Recession
Submitted by Tony Pallotta of Macro Story
How An Equity Market Prices In Recession
I'm not going to even begin to try and make sense out of today's market. Watching fires burn and teargas fired in Greece, 100 pip moves in the EUR/USD in minutes and computer algos tripping over each other was surreal beyond words. This market right now is a lottery. Calling equities forward looking or a pricing mechanism is beyond ridiculous.
It is during noisy times like these that investors must step back and keep things in perspective. Trading on days like today requires little skill and a lot of luck. When I step back I see a deteriorating economy and an equity market trying to understand what to do. Do they "price in" a soft patch or a full blow recession. Market participants are told it is in fact a soft patch. The slightest hint of positive data reinforces those views.
Using history as an example I want to share with you the 2007 "soft patch" and how equity markets priced in that economic headwind as well.
Below are a few notable quotes discussing the soft patch which in fact was a recession that began in December 2007 with Q1 2008 the first full quarter of contraction at minus 0.7% from the plus 2.9% in Q4 2007 (my how fast things can change).
- "We anticipate a soft patch in the middle of next year." - Morgan Stanley December 6, 2007
- "The economy is in a soft patch right now" - Mike Moran of Daiwa Securities December 23, 2007
- "Meanwhile, the Goldilocks economy remains alive and well." - Larry Kudlow January 4, 2008
- “The Federal Reserve is not currently forecasting a recession. It is however forecasting slow growth” - Fed Chairman Bernanke January 10, 2008
The following side by side comparison of the current SPX and that of December 2007 is messy but "bear" with me as the similarities are rather interesting. This is not an Elliott Wave analysis either. Notice the relationship among Point A, B, C, D and E on both charts.
The two highs of the topping pattern are Point A and C with C being slightly above A (imagine those technicians declaring a breakout).
The two lows of the corrections are Point B and D with D being slightly above B (imagine those technicians saying we put in a higher low thus bullish for price).
Point E is the question in terms of where we are now. Using the current trend lines off the 1,370 high SPX 1,320 would be the modern day Point E.
Equity markets struggled in 2007 to price in the recession efficiently and were only two months forward looking. In this highly leveraged, exuberant and low cash market why are we to think 2011 is any different?
As a reminder of a few other similarities, here you go.
- We have leverage back at pre Lehman Brother levels
- We have record low cash levels at mutual funds
- We have the end of QE2
- We have forecasts for contraction in Friday's ISM manufacturing based on actual regional manufacturing data for June
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Tyler, I think someone else mentioned it earlier, but could you slow down a bit?
;-)
Slow down? I would have requested the opposite, except it would be rude to ask.
For f**k sake Tyler, pull your finger out... more updates please, this site is too static.
LOL...
That is a terrible idea! Although I would like to say that Tyler(s) have been outputing extrodinarily high quality work at a stunning pace of late! ON A RAMPAGE FOR JUSTICE!
On a side note: I was saying to a friend of mine that I need to learn as much from Tyler as I can becuase I don't think he will be around after the crisis. He is the kind of person that appears in a time of crisis and fights for us all. The quality and accesibility of this info to my mind cannot simply be a business plan, but there must be a passion behind it that is driven by these times. Pay attention while you can, if you can aquire a good portion of Tylers skill you will never want for money again in your life, and then you too might be free enough to pick something worthwhile to fight for besides your next paycheck. That is what I hope for!
Insert Editorial Comment: I am glad to see you back, Macro Story. We beat ya up pretty badly (and maybe unjustly) on that recent blog. No hard feelings. Just kinda caught a nerve. As Aristotle is reputed to have said, "An educated person can entertain an idea without endorsing it." I guess we go back to school for more education some times.
I knew what kind of kids played in this sandbox before I entered it so no harm done. This group is nothing compared to the unions I used to work "with" in my old corporate days.
Editorial Addendum: First I miss the math problem (sheesh) and then I double post. It's back to school on the short bus.
David Bloom: 'Is There a Bigger Armageddon Out There?'
http://www.cnbc.com/id/43505730/David_Bloom_Is_There_a_Bigger_Armageddon_Out_There
this week, dollar's in trouble at 5.20 min
Guest Host David Bloomhttp://classic.cnbc.com/id/15840232?video=2030678890&play=1
One more day, that should do it. Just one.
LOFL.
How An Equity Market Prices In Recession - it doesn't. In the past, conventional wisdom dictated that the stock market anticipates six months ahead. In the chart it's clear that the market didn't even anticipate two months ahead - it was in the middle of its range when the recession began.
i'd agree with that ...the US property sector topped in 2006 then turned down.. the US stock markets didn't really nose-dive hard until Q3 2008 so i fail to see how self-annointed 'experts' like Rob Prechter (beaten hands down by a coin toss at market predictions) call the stock indexes "lead indicators". Surely we should look at all sectors for signs of tiring and collapse?
Prechter says the Indexes are "a process" of a number of sectors topping at slightly different times ...so we can safely say the Indexes are an averaging indicator, not a lead indicator, and pretty 'slow to show' given guidence in housing 2 years earlier
the other point Prechter makes is the Indexes are overly positive measures because bankrupt companies get taken out of the Indexes and replaced with still solvent ones so they do not reflect the actual carnage 'dropping' big negative numbers. So the Indexes are a rose-tinted spectecles, much delayed averaging unit of measure, not an accurate sharp as a tac lead indicator then!!
And given the Nasdaq has now retraced 100% of its 2008 to March 2009 decline you have to ask what fuking planet are these Indexes on given the shit-state of everything? Probably coming from the same planet, Uranus, that Prechter and his Elliott Wave muppets come from
looks like someone else has spotted the H&S about to finish off :) cheers-
The market is starting to price in the running out of ideas.
LOL! How do you price anything when it is totally corrupt and manipulated everywhere.
JPM, GS, The Fed, BS fake Chinese IPOs, HFT, Arbs, the options and futures exchanges. The whole thing is a totally corrupt fiat joke.
SH and RWM is how I priced it in... just hope I can find a bigger sucker down the road.
I noticed one way you can price it in. You see point D on the graph? In 2007 it dipped below the 200 DMA, this time it did not. At first this worried me, then I remembered I had watched the market all day during those times. There were several days where the market was obviously propped up over 780 in the RUT. This 2011 market would have done the same without manipulation. If you want to price in manipulation I think you can mark those reflection points above the 200DMA as the extent of the ability to manipulate. It's important to note they can't just pull a number out of their ass and make it happen, they need the market to help them, ie the 200 DMA line. Also you can price in manipulation by the amount of time it works. If for instance JPM whacks silver and sends it straight down with shorts, and it pops right back up to the previous level, they'll have a LOT of shorts they couldn't clear, and they'll back off until they can make a market whackjob stick. Rule of thumb is if they can't get it to hold 50% of the move they falsely make they'll usually back off, at least in the PM markets. All you have to do is remember where they want the manipulation to drive the market and watch out for levels they can drive one way or another and the market will allow them to hold.
lol
despite the cyclical nature of history 'tis a pity lessons from the past are never learned. "This time it's different!"
It's all transitory.
/s
The dollar is not a safe haven anymore. Quite bitching and get used to it.
Wait 3 hrs and try reposting that.
Economies have been mired in depression for decades, the dollar has lost its ass to inflation to the end sum, and you want me to do what now?
The withholding tax is back to 1 yr ago, the WLI (ECRI) has been down for how many weeks? 6? The market was all windowdressing, it's not pricing in any caution plus the Mafia is unloading the Cream of the Shit IPOs, if that isn't the end, don't know what is.
Watch initial claims, ISM and next weeks jobs# will be in the toilet.
When was the last time the FED forecast a recession?
they never have and always point the finger of blame elsewhere.
Listen to Ron Paul school Benocide on the Great Depression. Ben is a total buffoon.
http://www.youtube.com/watch?v=dv6rQ0U01Yc
Seems to be pretty good stuff. But, it sure would be nice to see time lines indicated. Please !!!
Think it's a weekly chart.
It's a daily chart with the 07 high in October and the current high May. I zoomed in so and cropped out the dates because I already had too much on them. Sorry!
The symmetry of the two charts is remarkable. I may need to schedule an eye appointment after that one. Wow.
Fuck it. FAS: ALL IN
That's the spirit! After all, it is a casino.
The PDs buy their own bank stocks to windowdress end of Q, easiest way to move market. You've got a big old gap, and $26 is resistance, good luck if you don't take profits fast enough.
http://stockcharts.com/h-sc/ui?s=FAS&p=D&b=5&g=0&id=p02077290925
Oh, I'm fast, alright.
Watch this...
... didn't see it, did you?
So its the Elves that run the HFT! I should have known after Alex Jones explained that bit about DMT elves.... That actually explains a lot!
We have all the same problems now that we had in 2007, only now they are
bigger because we didn't address them before. We also have more problems
now, like Europe meltdown and Mideast uprising and China looks more shaky now.
We also didn't have Japan's nuclear crisis, which to date hasn't been resolved.
We are now facing a global financial crisis which is larger and far reaching
than that of 2007 and due to massive government debt and insolvent banking
system, we are in a weaker position to defend the economy and prevent a total
meltdown.
Iambic pentameter or cut and paste?
I think it's like 1974, no?
http://dshort.com/articles/SP-Composite-secular-bull-bear-markets.html
This is much worse than 1974 and different in so many ways. For one thing they were not churning billions of shares a day back then with front running computer programs.
The "market" isn't pricing anything at all, GS, JPM, Citi, a few others, along with FRBNY and Treasury are doing all the pricing. But what does it matter anymore? Without a stable dollar nobody could possibly price anything with any assurance of being right, or close to right, and in those circumstance one just prices higher and hopes for the best.
I have not heard much lately about what market shorts are up to, or disclosures on insider trades, anyone got the quick dirt on those? Retirement can really slow a guy down.
That article assumes that inflation figures are accurate. We all know those figures are as cooked as an Irish stew.
Too much money has no where to park. This is the only way.
Too much worthless fiat money.
Let's see what happens if the S&P ends up on July 1st...
Meredith Whitney: Beware July 1
... she warned that July 1 is going to be a key date for the muni market, because that’s when new state budgets are going to take effect, slashing aid to many localities.
"Low cash market"
^A good three word summation of the equity market.
<<When I step back I see a deteriorating economy and an equity market trying to understand what to do.>>
I am moving more into cash (and gld slv) every day. "stocks" are super risky right now.
GLD is a buck from resistance, volume in crapper on this move, this will be going MUCH lower. Good luck. Silver is worse, it will go back to 28.
http://stockcharts.com/h-sc/ui?s=GLD&p=D&b=5&g=0&id=p45334350935
With cash, make sure it is not in a European money market fund. You won't know unless you ask, GLD and SLV are derivative vehicles with a promise to pay. If their sponsors have financial difficulty you lose. So be careful.
Pulau: I very very strongly suggest you start putting Harvey Organ on your daily reading list; he usually posts before 7:30pm est.
The S$P is running on vapor and low volume dreaming of fundamentally changing America with the jerks in Washington and pols around the world in charge. Skynet will fail, the algo will go nuts and the shit will fly. Central planning does not work in single countries, it will fail big on this new world wide attempt.
'scuse me whilst I shed a tear...
deleted
Well, this is scary, good post.
Dollar is a wreck here, at lows of the day. Way to go Timmaaayyyy.
All the pieces are in place. Just wait for the timing. Do not anticipate. Once it starts there will be plenty of time to feed the bear. Right now you still have The Bernank ready to destroy.
"How An Equity Market Prices In Recession"
What Recession, you idiots? Are you referring to one in 2008? What's the beef here? Stop BS doomster scenarios... Look at the charts and buy valuable Stocks, Recession my A$$, clowns..
All of this:
"
"
Complete horseshit..
Right, "end of QE2" did you even feel it? Fed keep doing
its work and swap lines still open till August 2012..
Go back to sleep.. Let's talkin in 1 year, when DOW hits 15k.
Do you have ONE SINGLE fact to back up your arguments? No, you don't. So buzz off. Nobody cares about your opinions.
I can draw you 100 chart scenarios showing different outlook.
Keep shorting, I think you already feel the pain, junkies..
We'll have down day on Friday, as usual, don't call me here
on the facts.. I'm betting against all of you, sorry, wrong
timing, you lose. Wait another 5 years or so... And keep
whining harder, that's helps the Markets go even higher.. :)))
Are you saying that complaining on Zero Hedge is responsible for lifting the Dow since Mar '09...interesting theory...I kind of like it.
Anyhow you are pretty much correct with what you say. But at times it is fun to read the comments section here, a/k/a The Wailing Wall. And fun at times to partake in said wailing.
The recession is over.
Recovery is coming eventually. Stocks are already moving up based on that premise.
If this was like 2007, you would not have consumer growth stocks hitting new world record, lifetime highs. They would have already cracked and headed down breaking support lines left and right, and the only thing holding the market up during the early stage bear market would be defensive and consumer staple stocks.
Right now, consumer staples, utilities, and growth stocks are all booming.
"The market isn't pricing in QE3, the market is pricing in an economic boom, led by the US consumer." - RobotTrader
"The recession is over." - RobotTrader
Immortalized forever.
"Recovery is coming eventually." - RobotTrader
Things will never fully recover until The Great Reset. Math always wins.
"If this was like 2007, you would not have consumer growth stocks hitting new world record, lifetime highs."
Strong argument. Remember October 2007? If you're going to troll, don't forget the hot pics. They at least provide some redeeming quality to your posts.
http://www.marketwatch.com/story/the-real-story-behind-the-market-boom-2...
That is a good story, makes a lot of sence. I wonder how to determine if companies are still buying their own stocks, or to get some sort of indicator out of those cash flows by tracking them. I'd esp like to know when those programs mostly stop and if they are clearing the purchasing to some central group managing it. For instance lets say you want to keep SBUX stock up, so you find out about a group of people who will protect your stock and the whole stock market with it. You allocate a certain sum to buybacks, this group then uses your sum only for your stock along points of resistance for the overall market or upon inflection points where they can use their skills to get the best bang for your buck, buying at low inflection points, getting a fairly good price and stabalizing the market as well. This peice of guesswork is pretty far out there, just a wild fancy most likely.
Harumph! The sky is falling, the sky is falling! These are all familiar themes at Zero Edge and elsewhere. I suspect the surprises will be to the upside...
Who gives a shit what you suspect. Can you back that up with facts? No? Then fuck off.
You have to admit the 'Zero Edge' is funny though.
good to see someone besides myself calling 1320 point as being crucial
those 2 spx charts do have stark comparisons.
Ahh Bullshit! I knew last friday I should have bought the fucking dip! I'll make a bold call- s&p 1650-1700 with in a year at most, WHY?, because that would seem impossible.
Here's another bold call.
Monkey's will fly out of your butt, WHY?, because that would seem impossible.
On another note, do you think before you type? Do you have to focus on breathing to keep from dropping dead?
Lastly, I went short at 1320, suck it.